Exam 11: How to Ensure That Projects Truly Have Positive Npvs

Economic rents are returns that

To best understand a proposed positive net present value project, managers should

A new grocery store requires $50 million in initial investment. You estimate that the store will generate $5 million of after-tax cash flow each year for five years. At the end of five years, it can be sold for $60 million (ignore taxes). What is the NPV of the project at a discount rate of 10 percent?

The formula P₀ = P_t/((1 + r)^t)applies to assets that I.pay no dividends; II.are traded in a competitive market; III.cost nothing to hold

If you use futures prices to estimate the cash flows from commodity production, the estimates are I.present values of future cash flows II.certainty equivalents; III.same as the estimates using spot prices

Increasing market share is typically a successful strategy to create economic rents in a competitive market.

If you use futures prices to estimate the cash flows of a project, which discount rate should you use? I.the cost of capital for the firm; II.the cost of capital for the project; III.the risk-free rate

You inherited a run-down house in Chicago. There is an active market in properties of this type, and similar properties currently sell for $100,000. If rented, the property can deliver cash returns of $12,000 per year forever. If the appropriate discount rate is 15 percent, how much is the house worth?

In a highly competitive market, how will a firm most likely produce positive economic rents?

You are a manager considering a positive-NPV project. Which of the following announcements indicate that you may have underestimated its NPV?

The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300. (Assume no taxes.)If the salvage value of the plant at the end of year 1 is $80,000, should you scrap the plant at the end of year 1?